Keyman Insurance Tax Treatment: How Is Keyman Insurance Taxed? 

You’re the owner of a small business. You’ve been in operation for a few years and things are going well. You have a great team of employees who are essential to the success of your business. You want to make sure that your business is protected in case something happens to one of your key employees, so you decide to purchase keyman insurance. 

Now that you’ve made the decision to purchase keyman insurance, you need to understand how it is taxed. Keyman insurance is taxed differently than other types of life insurance policies. In this article, we will discuss the tax treatment of keyman insurance and answer some frequently asked questions about keyman insurance and taxes. 

What is keyman insurance? 

Keyman insurance is a life insurance policy that is purchased by a business to insure the life of a key employee. The key employee could be the owner of the business, a partner in the business, or any other employee who is essential to the operation of the business. 

If something happens to the key employee, the keyman insurance policy will pay out a death benefit to the business. The death benefit can be used to help the business continue to operate, to cover the costs of recruiting and training a replacement employee, or for any other purpose that the business deems necessary. 

Why is keyman insurance taxed differently than other types of life insurance policies? 

The tax treatment of keyman insurance is different from other types of life insurance because keyman insurance is considered to be a business expense. 

When a business purchases keyman insurance, the premiums are typically deductible as a business expense. The death benefit from a keyman insurance policy is also generally tax-free. 

How is the keyman insurance tax treatment determined for a keyman insurance policy? 

The tax treatment of keyman insurance is determined by the Internal Revenue Code (IRC). The IRC provides specific rules and regulations regarding the tax treatment of keyman insurance. 

Who pays the taxes on a keyman insurance policy? 

The business owner or the key employee usually pays the premiums for a keyman insurance policy. The business owner may also be the beneficiary of the keyman insurance policy. 

If the business owner is the beneficiary, then the death benefit from the keyman insurance policy will generally be income tax-free. 

When are keyman insurance policies subject to estate taxes? 

Keyman insurance policies are subject to estate taxes if they are owned by an individual. If a keyman insurance policy is owned by a business, then it is not subject to estate taxes. 

What are the keyman insurance tax implications for the policyholder? 

If you are the policyholder of a keyman insurance policy, the premiums that you pay for the policy are typically deductible as a business expense. The death benefit from the keyman insurance policy is also generally income tax-free. 

What are the keyman insurance tax implications for the beneficiary? 

If you are the beneficiary of a keyman insurance policy, the death benefit from the policy is generally income tax-free.  

Are there any other keyman insurance tax implications that I should be aware of? 

Yes, there are a few other keyman insurance tax implications that you should be aware of. 

First, if the key employee dies, the keyman insurance policy will pay out a death benefit to the business. The death benefit can be used to help the business continue to operate, to cover the costs of recruiting and training a replacement employee, or for any other purpose that the business deems necessary. 

Second, keyman insurance policies are subject to estate taxes if they are owned by an individual. If a keyman insurance policy is owned by a business, then it is not subject to estate taxes. 

Finally, if you are the policyholder of a keyman insurance policy, the premiums that you pay for the policy are typically deductible as a business expense. The death benefit from the keyman insurance policy is also generally income tax-free. 

Keyman insurance can be a valuable tool for businesses to protect themselves from the financial consequences of the death of a key employee. 

Conclusion 

In short, keyman insurance policies are subject to a variety of taxes, depending on who owns the policy and who the beneficiary is. The premiums for keyman insurance policies are typically deductible as a business expense, and the death benefit from the policy is generally income tax-free. It is important to understand these tax implications before you purchase a keyman insurance policy.